Why a Short Sale Is Better Than a Foreclosure.

Both a foreclosure and short sale can devastate a borrower’s credit history, but it is far better to select the lesser of these two evils. A short sale will negatively affect a credit score for a shorter period than a foreclosure and leave the borrower in a better position to buy a home again soon. Here are three considerations that affect you the most.

Reason #1

Every state has different regulations on credit ratings, but you can usually expect an 80 to 100 point decrease in your credit score from a short sale. The actual point drop may differ, depending upon other things that also affecting the credit score. By contrast, a foreclosure typically leads to a drop in your credit score of more than 250 points! Thus, even if you start off with an excellent 800 point credit score, a foreclosure can leave you with a score of a very low score of 550 points that makes a new home loan a hopeless cause.

Reason #2

The biggest difference between a foreclosure and short sale is that a short sale allows the borrower to purchase a new property soon after, so long as he/she misses no mortgage payments, has signed no promissory note, and has not had a deficiency judgment passed against him/her. Even if the borrower has had one these things occur, he/she still has the freedom to buy another home within two years. The foreclosure, however, would typically require the borrower to wait about 5 to 7 years before applying for a new mortgage. After a foreclosure, the borrowing terms for the new mortgage will likely be tighter as well.

Reason #3

Another big disadvantage to a foreclosure is that this always carries a deficiency judgment, while a deficiency judgment is rare for a short sale in which the lender agrees to solve the debt jointly. The lender (i.e., bank) does not have to acquire the property in a short sale. Rather, the borrower is selling to a buyer at a cost below the loan value.

Ultimately, each borrower and lender must resolve whether property will be foreclosed or sold short. But, you, as the borrower should consider the short sale advantages to your credit and to your ability to purchase another home in a reasonable time frame.

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